Oil prices climb amid output cuts

Oil remains bid in Asia on Venezuela sanctions and OPEC output cut

Lloyd Bates
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14 February, 2019, 07:54

The world has plenty of oil, but perhaps not the right type of oil.

Do they bid ever-increasing amounts for what heavy oil remains in the market, do they lower run rates, or do they try and switch to using more light crude? This trend has been underway for some time, but the deviation has magnified recently, and could cause havoc as 2019 wears on.

The biggest impact on demand will be a U.S.

Less oil exports than it expected and the possibility of waivers not being extended to major buyers are more bad news for the Iranian government which has based its next fiscal year's (starts March 21) budget on 1.54 mb/d oil export.

A boy walks past an oil tanker train stationed at a railway station in Ghaziabad, on the outskirts of New Delhi, India, February 1, 2019. WTI is also better bid at $53.65 per barrel.

"Oil prices have not increased alarmingly because the market is still working off the surpluses built up in the second half of 2018, when global supply is estimated to have exceeded demand by 1.3 mb/d".

Numerous region's refineries are new and are optimized to process heavy and sour crudes. Crude prices have since recovered roughly 20 percent from the annual lows of last December, bolstered primarily by the decision to cut supplies.

Refiners can not easily swap out one type for another.

But this trickles over into the product markets as well. Meanwhile, the lack of medium and heavier barrels, which produce relatively more diesel and other distillates, means that margins for diesel have shot up.

Just months earlier, they had relaxed production caps as prices shot higher on market worries about the impact of USA sanctions on Iran.

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"We believe that oil is not pricing in supply-side risks lately as markets are now focused on U.S".

Helping to keep a lid on the market are adequate global inventories, the prospect of weakened demand tied both to U.S.

The IEA said that these quality differences could cause some problems this year.

Asia's oil refiners are increasingly finding themselves trapped between the rock of OPEC's production cuts and the hard place of U.S. President Donald Trump's sanctions against Iran and Venezuela. "In quality terms, it is more complicated".

The IEA also highlighted this rather freakish pricing movements.

This represents a premium of $4.21 a barrel for the light crude, but this is down from a gap of $6.18 as recently as early October past year, and $7.26 at the start of 2018.

OPEC Secretary General Mohammad Barkindo urged members of the producer group and its 10 allies "to remain firm in achieving" their output cut goals.

Saudi Arabia, the de-facto leader of OPEC, announced that it had reduced its output by a further 500,000 barrels per day on top of the agreed output cut under the OPEC deal.

At the same time, the U.S. EIA just published its Short-term Energy Outlook, in which it revised up its forecast for U.S. shale growth by an additional 300,000 bpd. Should the issue be resolved quickly, crude production could return to levels seen in prior years and flood the market further.

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